Quick Technical: Energy stocks

1) All sectors of the S&P 500 are overbought (too extended on the upside) except for the energy and material sectors. We can reasonably assume there will be a price correction or a sideways movement in the short to medium term (1 to 2 months). 

2) Exxon Mobil (XOM) pays a 5.08% dividend and is trading at the same price levels that it was in 2006. This dividend rate makes Exxon an attractive addition to a portfolio though it increases exposure to the risks associated with the energy sector. This exposure to the energy sector risk can be mitigated by investing in the diversified Vanguard energy ETF (VDE) which pays a dividend of 3.4%.

3)All the recent headlines about climate change (unusually warm winter temperatures, fires in Australia, etc.) are holding down stock prices in the “fossil fuel” energy sector – however they seem too depressed based on the profits companies in the sector are still generating. The geopolitical risks of oil shipment disruptions in the middle east can also increase prices in the sector. We may also see an acceleration of efforts by energy companies to diversify into renewable companies through acquisitions of clean technology companies -negating their unfavorable press coverage. 

4) Interest rates are still very low (10-year US rates are 1.8% now vs. 2.5% a year ago) which suggest that stock prices (especially those that pay dividends) are still attractive relative to bonds.